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Clearing Firms Gain a Human Touch

Moving beyond its transaction focus, the clearing industry aims to help broker-dealers appeal to women clients, navigate social media and more.

Traditionally, clearing firms have helped independent broker-dealers by ruling the back office. Now these durable companies are stepping out front by tuning BDs in to vital growth opportunities—as well as to potential perils.

Their expansion is all part of the accelerating evolution of clearing firms from providers of basic execution, custody and reporting services to muscular guides helping BDs grow and flourish in these challenging, competitive times.

Just a few issues clearers are bringing to the surface include how BDs must be ahead of the curve to counter ongoing low interest rates, the pressing need for risk management of every sort and how to embrace today’s—and tomorrow’s—changing investor.

“All clearing firms have the ability to process trades, and the technologies behind that are not all that different. It’s service that goes above and beyond that differentiates clearing firms. This is critical,” says Robb Combs, director of correspondent clearing, Raymond James & Associates, based in St. Petersburg, Fla.

Such service can take the form of a clarion call for BDs to take their heads out of the sand. With interest rates continuing at unprecedented lows and the likelihood of a rise in the next year or two a fantasy, correspondent clients must focus on what this means to their clearing-firm relationship.

Indeed, clearers historically have derived one-third of their revenue from interest. But for at least the last four years, this revenue source has been wiped out because of stuck-in-the-cellar rates. Something’s gotta give. That’s pricing—and it is on the ascent.

“Clearing firms’ prices per trade are already starting to go up. In the next year or two, you’ll see this as a big trend. The largest firms will start it. The cost of services will be driven up,” says Craig Gordon, director of RBC Correspondent and Advisor Services, in Minneapolis.

He continues: “The message to broker-dealers is clear: If you’re not planning for an environment with higher operating costs, you’re going to miss the boat. If you’re not the mouse that can find a new cheese—source of revenue—you’ll be in trouble.”

Gordon, a clearing industry veteran, foresees further cuts in services that are now part of firms’ bundled pricing: e.g., fees for IRA accounts or the elimination of order desks.

“It’s already started to happen,” he says. “Independent broker-dealers are being asked to do more and/or pay more.”

In this scenario, BDs, not surprisingly, are likely to pass increased costs to their FAs, who, not surprisingly, won’t be thrilled.

“The reps will feel it in their pocketbook and say, ‘I’m not going to take a pay cut!’ So they’ll pass it on to their clients,” Gordon says. “It’s unrealistic to think that clearing costs won’t be going up. Step out of the forest! Firms that don’t anticipate the change and the need to diversify their revenue source are going to be left by the wayside.”

The two biggest clearers, Pershing and National Financial, with 1,500 and about 270 clients, respectively, maintain that they’ll keep pricing stable.

National Financial’s Sanjiv Mirchandani, president of the Fidelity Investments unit, headquartered in Boston, states: “We’re committed to providing competitive pricing. I certainly don’t see us moving away from that approach. Nor do we have plans to cut services.”

Other clearing firms acknowledge that costs are rising but also insist they have no plans to raise prices.

“Clearing has been driven down to commodity-type pricing, and the dollars being spent by the firms are for additional tools to run your business,” says Combs, whose unit has 42 clearing clients. “So, it’s a logical assumption that prices will rise—but not by us.”

The antidote to low interest rates and lost revenue is not to raise prices, says William Coppel, managing director and chief growth officer, First Clearing, based in St. Louis, which has 88 clients. “Raising prices to maintain your market share and position is a bad strategy. Rather, you’ve got to help [BD] firms grow. Focus on increasing the efficiency of your business so you have the capacity to serve more clients and drive your top-line revenue.”

Female Focus

One smart way clearing firms are fostering client growth is making broker-dealers aware of the nation’s changing demographics and how this affects their very livelihood. Some clearers have even become founts of knowledge on how to embrace the female investor and the tremendous opportunities therein.

These firms have funded white papers detailing how FAs can better tap into this fertile market by trying to psych out the female psyche.

Co-published by First Clearing and Cannon Financial Institute, “Women and Wealth: The Invisible Opportunity” combines the latest research along with practical advice for BDs and FAs.

The paper points out that: “Over the past 30 years, the number of working women has doubled. Women control about 33% of the wealth in North America. By the end of this decade, women will be in control of $22 trillion. Within three years of a husband’s death, 70% of widows choose a different advisor.” Despite all that, the paper says, women often report being “ignored and treated with condescension by the industry.”

“Women and Wealth” goes on to state that because of “differences in the biology of male and female brains,” women, in contrast to men, want “an ongoing relationship with an advisor who takes the time to get to know and truly understand their needs.”

Says Coppel: “Affluent women want a personal relationship with their advisor. But that will be really hard for a lot of advisors because they have horrible interpersonal skills.”

The paper concludes that most FAs need training to learn skills to develop “the right experience” for the affluent female investor.”

“Our research,” Coppel says, “is aimed at better preparing the advisor community to deal with the demographic phenomenon that is shifting wealth from what was largely a male-dominated population to what eventually will be a female-dominated population.”

A white paper from Pershing, a BNY Mellon affiliate, is titled “Women Are Not a ‘Niche’ Market. They Are a Significant Business Opportunity.” It points out that “about 80% of women will be solely responsible for household finances at some point in their lives.” The research survey found that “women were more likely to engage with financial advisors than were men (46% vs. 34%).”

Notes Crowley: “Advisors need to shift their thinking. Whereas historically, the behavior has been to focus on the male, that is now a losing proposition for advisors inasmuch as women control a greater portion of the wealth, are going to control more of it and that there are more women in the work force than men.

Says Crowley: “The headline is: Advisors and broker-dealers need to be paying attention to the environment because it’s changing very quickly, and the market is too volatile.”

Last November, Fidelity Investments, of which National Financial is a unit, released its latest annual “Millionaire Outlook Series” research study on attitudes and behaviors of millionaire investors. Key findings concerning females include “indications that women are investing more conservatively than men and could benefit from investment guidance; more women are interested in holistic planning [versus] more men focused on greatest investment return” and that “women generally do not feel as wealthy as men even though the amount of household assets is similar.” In addition, 77% of the women said that the most important benefit in working with an FA is it “helps protect my wealth.”

“The rise of the woman investor cuts across all demographic groups”—seniors, boomers, generations X and Y, notes Mirchandani. “Women control 50% of the wealth in the country. And because of life expectancy, they are going to control more like 60% to 65% in just the next 10 years. Women-owned businesses are a huge rising force of the economy.” He adds, though, that “women perceive the financial services industry quite negatively.”

To help counter that, National Financial has launched a series of practice management tools to improve FAs’ approach to women clients, stressing that female investor needs differ from those of men.

Beyond Transactions

Concurrent with big changes in the investor demo profile, no longer is the clearing industry your grandmother’s clearing industry. That is partly a reflection of a shift in the entire financial services world and securities markets.

“It’s common knowledge that the daily transaction count of all the exchanges is down significantly. This is redefining the space where we often measure growth and success based on the daily amount of retail transactions. That model is obsolete,” Coppel says, “because it’s now much more about asset management.”

He continues. “An advisor compensated based on their advice is a very different model from a transaction-oriented advisor. This re-architects the landscape relative to clearing firms and brokerage firms. Therefore, as clients come back into the market, we have to look at how they’re investing.”

At the same time, as a result of the financial crisis and heightened consumer awareness, clearing firms are putting much more emphasis on risk management.

Pershing, for instance, has created technology for trade surveillance and sales surveillance, which are integrated into its offering and available on a variable-cost basis. The sales surveillance tool allows management to review advisor behavior in order to fulfill oversight responsibilities.

Raymond James earlier this year rolled out its new Supervisory Work Station, a system that gives correspondents a look at all aspects of their operation, for example by showing important trading and customer account parameters “to help run a clean business,” Combs says.

To be sure, clearing firms themselves are taking on more responsibility for risk management. “It used to be simply plug-and-play, a processing business where it was up to the introducing firms to manage their own risk and supervision,” Coppel notes. “Now it’s everyone’s responsibility to know who you’re doing business with. All the firms are taking a much closer look at the folks they want to serve. It’s very imprint to take nothing for granted and to look deeply into the type of business we’re going to affiliate with or work with.”

First Clearing’s Protect Offering, part of the firm’s basic clearing package, includes tools on how to navigate daily risk-management issues that have emerged as a result of Dodd-Frank.

Social Rules

Another super-timely matter that clearing firms are addressing is social media in the financial services arena. While this is something of a conundrum given compliance and monitoring requirements—still unclear—the hot new form of communication is here to stay and therefore warrants BD attention.

Though some broker-dealers are testing social media, it is still too early for the phenomenon to become mainstream in the industry.

“It’s sexy to talk about because it’s new, but it’s treacherous waters to navigate because you’ve got all the regulatory requirements about what you can and cannot say, and how it has to be monitored,” notes RBC’s Gordon.

Virtually every National Financial client has been looking at social media, Mirchandani says. “But people are waiting for more clarity on the rules. Firms are definitely experimenting with it—writing blogs, getting on LinkedIn, Facebook, Twitter. Those are all things that good advisors are going to have to leverage to connect with their clients in the way they want to be connected. It’s absolutely an important issue; but it’s not necessarily ready for prime time.”

Some Pershing clients have been trying out social media, but the clearer has yet to deliver pertinent tools. Yet, Crowley says, “our research tells us that you really do need to be paying attention to social media developments and thinking about what the behaviors of the future generation of investors and advisors will be and how social media will play a role. You have to have service to meet those behavioral changes.”

Another issue, of course, is that the infrastructure, monitoring and record-keeping of social media participation will necessitate substantial financial investment. “We’re interested in helping our firms navigate that,” Coppel says, “but it will take some time before social media finds its appropriate level and effectiveness in the client-advisor relationship.”

All in all, nowadays clearing firms are serving in a far more consultative capacity to guide clients through the choppy, often strange, waters of the 21st century.

“This is not a time for business as usual,” Mirchandani says. “You have to start to get creative and really define your strategy.”